FIA released a statement today commending the Treasury Department’s work on the Capital Markets Report. While FIA continues to analyze the full report, FIA president and CEO Walt Lukken praised the report for addressing many important capital market issues that impact centrally cleared derivatives.
“We appreciate the Treasury Department’s diligent work to create a thorough, analytical, and well-researched report,” said Walt Lukken, president and CEO of FIA. “Treasury’s recommendations will help to further strengthen and enhance centrally cleared derivatives markets.”
The Treasury recommendations on ensuring appropriate hedging exemptions for position limits, restoring the CFTC’s exemptive authority, promoting principles-based regulation, and promoting supervisory stress testing for CCPs are all among issues FIA considered extensively along with other recommendations to address market health in a Roadmap to Smarter Regulation & Healthier Markets published in May.
In particular, the report’s analysis of capital requirements matches the data FIA has collected showing that the capital treatment of central clearing is detrimental to the health of cleared derivatives markets.
The report includes the following recommendations on capital requirements for centrally cleared derivatives:
- Initial margin for centrally cleared derivatives should be deducted from the Supplemental Leverage Ratio (SLR) denominator
- Capital requirements should be calculated using an adjusted SA-CCR methodology that provides an offset for initial margin rather than the current CEM methodology.
- U.S. banking regulators and market regulators conduct regular comprehensive assessments of how the capital and liquidity rules impact the incentives to centrally clear derivatives and whether such rules are properly calibrated.
“The appropriate tailoring of capital requirements is one of FIA’s top priorities,” Lukken said. “Currently, various capital rules increase the cost of client clearing, which undermines one of the key tenets of financial reform following the crisis, which is to utilize the safeguards of central clearing for standardized derivatives contracts. It also reduces end-users’ access to these markets which impedes their ability to effectively manage risk. Addressing this issue is critical to maintaining access to central clearing.”